Sterling jumped back above $1.23 on Wednesday, trading up 1.5 percent on the day after Britain’s prime minister offered to give lawmakers some scrutiny of the process to leave the European Union, calming worries about a “hard Brexit”.
Theresa May made her offer to lawmakers and said it came with the condition that they do not “undermine” her negotiations with the 27 other members of the bloc.
Fears that Britain will give up full access to the EU’s single market in order to impose maximum control on its borders – a scenario known as “hard Brexit” – drove sterling to a 31-year low last week, with the currency briefly plunging as low as $1.1491 on Friday, finishing the week just above $1.24.
It continued to fall sharply at the start of this week, going as low as $1.2090 on Tuesday but jumped after reports of May’s offer emerged early on Wednesday, trading up 1.5 percent by 0755 GMT at $1.2302 – its first rise for five days.
“Now that we’ve got ourselves pricing in a pretty hard-looking Brexit into market sentiment … we’re going to be sensitive to anything that challenges that view that we’re putting control of immigration above protecting access to the Single Market, bank passporting etc,” Societe Generale macroeconomic strategist Kit Juckes said.
“We needed a catalyst – we got one, but the catalyst doesn’t look like a game changer.”
Against the euro, sterling also jumped 1.5 percent to 89.88 pence.
Norway’s sovereign wealth fund, the world’s largest and a major owner of British shares and government bonds, told Reuters on Tuesday that Friday’s “flash crash” was a correct move that reflected the expectations for Britain’s economy.
The major banks have stuck to forecasts of about $1.20-1.25 for sterling, but Friday’s apparently computer-trader-driven 10-minute slide has some wondering if a drop closer towards parity is likely.
“Sterling is likely to trade with a negative bias under this uncertain backdrop,” ING currency strategist Viraj Patel wrote in a research note. “Greater uncertainty will also see a more protracted slowdown in the economy, a lack of investment appetite from overseas investors/firms and heightened risks around the funding of the UK’s current account deficit.”
“All of these are medium-term sterling negatives and we look to fade any knee-jerk sterling/dollar recovery, with a strong dollar environment likely to see a move down to the psychological $1.20 level.”